Fiscal Policy Isn’t Having Much Effect on the Economy: Brookings

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For all the debate over the economic impact of the tax cuts and the boost in the federal budget, it looks like fiscal policy had little effect on growth in the first three months of 2018.

According to the newly updated Fiscal Impact Measure at the Brookings Institutions’ Hutchins Center, “federal, state and local fiscal policies had little effect on the pace of economic activity in the first quarter of 2018, adding less than one-tenth of a percentage point to GDP growth.” The Commerce Department said first quarter GDP grew at a 2.3 percent annual rate in its initial assessment released Friday.

The Hutchins Center model measures the impact that federal, states and local fiscal policy have on economic growth, and includes government purchases, taxes and transfer payments. When the index is positive, government fiscal policy is contributing to economic growth; when it is negative, government fiscal policy is subtracting from it.

Analysts found that “tax and transfer policies had a small negative effect on GDP growth” in the first quarter. A modest increase in state and local spending had a small positive effect, though authors Louise Sheiner and Sage Belz note that the “sector has been persistently weak over the last two years, and has yet to recover to pre-recession spending levels.” Federal spending, which rose at a 1.7 annual rate, also provided a small boost.